M&A negotiations with limited information: how do opaque firms buy and get bought?

We model theoretically and quantify empirically the impact of informational frictions on managerial decisions in the context of mergers and acquisitions. In particular, we focus on how bid premiums and methods of payment are affected by the bidder and target firms' degrees of opacity. To this end, we model the negotiation between bidder and target as a signaling game with two-sided private information. We then empirically test the model's predictions concerning the effects of target and bidder opacity on the simultaneous determination of the method of payment and the bid premium, by conditioning cross-sectionally on the basis of firms' stock trading properties, which we interpret as representative of individual firm opacity. Consistently with the predictions of our model, we find, by studying a sample of bids by and for U.S. publicly listed firms over the period 1985-2014, that both the likelihood of a stock bid and the bid premium increase with the opacity of the target, while the opacity of the bidder is related to lower bid premiums.